U.S. Backs Out Of Another Deal With Finmeccanica

The last few years have been tough for European defense manufacturers that planned a decade ago to boost their presence and, if possible, establish manufacturing sites in the U.S.

The past year has been a bitter pill particularly for Italian conglomerate Finmeccanica, which owns Alenia Aeronautica. The top two programs cited by the company's North American branch—both centered on a tactical cargo airlifter—have now fizzled in the U.S. market. A recent decision by the U.S. Air Force to end work on a training and support contract for the Afghan Air Force's refurbished G222 transports was a major blow last month, right on the heels of its decision last winter to end buys of a new version of the aircraft, called the C-27J.

The company was already disillusioned with its Pentagon experience after the abrupt 2009 cancellation by the Navy of the next-generation U.S. presidential helicopter program, for which Finmeccanica's AgustaWestland helicopter unit was teamed with Lockheed Martin.

Despite these setbacks, Finmeccanica officials say they do not plan to cut back their U.S. operations. “Finmeccanica's presence in the United States dates back more than a century and our commitment to this country extends long-term. We remain highly optimistic about our future prospects in the largest defense and security market in the world,” says a statement provided by Finmeccanica North America spokeswoman Angelica Falchi. “We are currently in pursuit of both near- and long-term programs with the U.S. government.”

Potential opportunities include a forthcoming competition to replace the aging Air Force T-38 fast jet trainer fleet with about 350 new airframes as well as an Army OH-58D Kiowa Warrior follow-on.

Finmeccanica North America's 2008 acquisition of DRS Technologies, primarily known for providing electronic systems to the Pentagon, is expected to be a major growth area. The company's North America operation is in the midst of a restructuring designed, in part, to adjust to U.S. market realities. Headquarters in Rome has also undergone a restructuring, including consolidations aimed at operating efficiencies.

The G222's demise is not only a bad mark for Alenia; it is the latest in a string of failures by the Pentagon to efficiently field aviation assets for Afghanistan as the White House presses ahead with plans to pull forces out in 2014.

The Army botched its plans to sole-source and field Mi-17s there. And the Air Force has yet to make good on a promise to field a light attack/armed reconnaissance aircraft for Afghanistan after a contractor protest waylaid its source selection process.

Meanwhile, Finmeccanica's hopes of establishing a stateside final assembly footprint in the near term are dashed. And it is nearly impossible for the company to meet its internal growth plans in the U.S. without these major contracts.

Unlike the C-27J program, which was outright terminated, the Air Force opted simply not to renew its contract with Alenia North America to support and induct the G222s, dubbed the C-27A by the service, into the Afghan Air Force.

The final decision was relayed by the Air Force in a Dec. 18 letter following two earlier warnings of dissatisfaction with Alenia's work.

The G222 program was Alenia's first as a prime contractor for the Pentagon. The Air Force paid Alenia $341 million to refurbish 20 aircraft—bringing five configurations of the G222 into a single C-27A variant—for the Afghan Air Force. USAF officials praised Alenia's performance, despite some early refurbishments requiring 50% more hours than planned, for which the company picked up the tab.

But major issues surfaced as Alenia moved forward in executing a second deal worth more than $600 million to train Afghan pilots and crews and support the fleet in Afghanistan.

The decision comes after what Air Force officials call “failed attempts” by Alenia to “generate a sufficient number of fully mission-capable aircraft for effective [Afghan] airlift capability.” According to Ed Gulick, a USAF spokesman, “though the Air Force assisted Alenia throughout the program in an effort to help the program succeed, Alenia struggled to consistently achieve key contractual requirements.”

An industry official says Alenia is exploring whether it has any recourse to the decision. As this is not a contract termination, there is little opportunity for significant termination liability costs to be reimbursed. And without a major U.S. prime contractor involved, the company does not have significant weight in Congress to seek political help outside the Pentagon.

Sixteen of the 20 aircraft have been delivered to Afghanistan—though not all are flyable. Four remain in Italy. Despite a deployed team of contractors, and a decision by Alenia to bring in DynCorp last March to help rectify the problems, the fleet has been temperamental and was grounded twice, once in December 2011 on airworthiness grounds and again last March because of safety issues that delayed the training of Afghan personnel.

While acknowledging problems with the aircraft's introduction, a company official says the fleet is now exceeding the requirements set by the U.S. Air Force. The industry official says Alenia was sent notices warning it of contract deficiencies but never received Air Force feedback on its responses. Alenia funded some contract activities, although terms were not fully ironed out.

“Conservatively, we spent around $20 million of our own money sourcing new parts for these aircraft. That was spent in good faith to retain the contract,” the industry official says. Alenia sourced parts from G222s stored in Argentina to keep the Afghan fleet going and brought in DynCorp for engineering and training and General Dynamics for translation services. Engineers were limited by the number of available hangar slots as they worked on the aircraft, the industry source notes.

Air Force officials acknowledge that 10 aircraft are now flying, and the industry official points out that this exceeds the six required.

Around $600 million has now been spent on the program, and the industry official believes that spending another $60 million would ensure the type's continued operation. This would cost less than introducing a new type such as the C-130, into the fleet, according to the industry official, who says such a move would require the retraining of personnel on a more complex system.

Air Force officials note that they will provide some C-130 support to help close the gap left without the G222s. Also, 26 Air Force-procured Cessna 208s and the Mi-17s bought by the Army are providing airlift in Afghanistan.

In a statement, an Alenia spokesman says the company remains committed to the success of the G222 program and the U.S. Air Force as it stands up a trained and capable Afghan Air Force. “Our team works tirelessly to support the program, meet our commitments and swiftly address any concern, big or small, even those connected to other parties,” the company says.

The NATO Training Mission and the USAF will suspend C-27A flight operations in Afghanistan in the coming weeks, but no decision has been made on the final disposition of the aircraft and the associated support equipment and spare parts.

Gulick says, “Air Force leadership continues to recognize and support Afghanistan's need for a sustained medium-airlift capability to meet current and future Afghan national security requirements. U.S. and Afghan Air Force leadership are engaged in talks . . . on the next steps.”

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